GDP to grow by 6.9% in 2018-19

by Mahesh Vyas

Most economists believe that the Indian economy will grow at a faster pace in 2018-19 than it did in 2017-18. Professional forecasters surveyed by the RBI believe that the growth will accelerate from 6.6 per cent in 2017-18 to 7.3 per cent in 2018-19. The RBI itself believes that the growth will scale up to 7.4 per cent.

However, industry does not share such optimism. The RBI’s industrial outlook survey show weaker prospects for production, order books, capacity utilisation, employment and profit margins. Consumer confidence is down and households are not sanguine about their income and employment prospects.

We believe that the year may turn out somewhere in between the two views. Real GDP growth will accelerate moderately, from 6.6 per cent in 2017-18 to 6.9 per cent in 2018-19.

The optimism regarding a turnaround is based on a belief that the economy took a hit following demonetisation and poor implementation of GST and that this problem is now behind us. Hope also hinges on a consolidation and strengthening of the recent pick up seen in capital formation numbers in the CSO’s national accounts data.

RBI’s analysis, explained in its Monetary Policy Report, April 2018 suggests that the cyclical component of the investments has shown an upward trend since 2016-17. It also suggests that “the upturn in the investment rate that commenced in Q3:2016-17 has approximately nine more quarters to fully play out.” But it cautions that “timely and measured interventions hold the key to realise the investment-led growth.”

Listed non-finance companies reported y-o-y growth in net fixed assets of 6.9 per cent and 9.2 per cent as of the end of March 2017 and September 2017, respectively. However, these seem to merely recover from the fall registered in the corresponding year-ago values. It may be too early to draw inference that corporate sector’s investment into fixed assets has picked up. Besides, the first hundred companies that published their results for the period ended March 2018 suggest a negligible 0.5 per cent growth in net fixed assets.

CMIE’s CapEx database suggests that investments have slowed down in every respect. New investment proposals have dropped to historical lows, projects abandoned have peaked and project completions have fallen. The little momentum seen in capex in 2014-15 dissipated quickly.

We believe that low capacity utilisation and low consumer confidence seen in RBI surveys and the low confidence levels in industry as seen in CMIE’s CapEx database indicate that the expected investments revival may be elusive. We expect the investment ratio (real gross fixed capital formation to GDP) to increase from 31.1 per cent in 2016-17 to 31.3 per cent in 2017-18 and then to range between 31.2 per cent and 31.4 per cent in the next four years.

We expect gross fixed capital formation growth to slowdown to 6.6 per cent in 2018-19 after having grown by an estimated 7.1 per cent in 2017-18 and an impressive 10.1 per cent in 2015-16.

Unlike the RBI, whose analysis suggests that the current pick-up in investments will play out over the next nine quarters, we believe that investments would stabilise at current growth rates and pick up after two years. We reason that it would take some to absorb the available slack capacity and for stressed assets to be absorbed by new owners before fresh investments would commence aggressively.

Private final consumption expenditure has grown by a steady and robust 6.5-7.5 per cent in the past four years. Intriguingly, neither demonetisation nor the poor implementation of GST seems to have impacted the growth in private final consumption. Private final consumption expenditure growth seems to be remarkably immune to slow or no growth in employment, falling consumer sentiments or falling expectations on income or employment or even periods of poor agricultural growth.

While it is difficult to explain such resilience, we do recognise its existence and build the same into our forecasts. Apropos, we expect private final consumption expenditure to grow by a steady and robust 6.5-7 per cent per annum in the coming four years.

Global growth is projected to accelerate from 3.7 per cent in 2017 to 3.9 per cent in 2018 and 2019. However, global trade growth is projected to slowdown from 4.7 per cent to 4.6 per cent and then 4.4 per cent. This along with challenges faced by domestic exporters following demonetisation and implementation of GST is expected to contain exports growth to close to 5 per cent in 2018-19.

The global outlook does not indicate that India can ride a recovery on the back of robust global growth and trade. The recovery will need a strong domestic investment rebound. We feel that this is unlikely in the next two years. But, a mild recovery from a growth of an estimated 6.6 per cent in 2017-18 to about 6.9 per cent in 2018-19 is possible. Further, we do not expect growth to accelerate far beyond 7 per cent in the near future.

Unemployment Rate
Per cent
5.5 +0.0
Consumer Sentiments Index
Base September-December 2015
95.6 +0.2
Consumer Expectations Index
Base September-December 2015
96.0 +0.3
Current Economic Conditions Index
Base September-December 2015
95.0 0.0
Quarterly CapeEx Aggregates
(Rs.trillion) Sep 17 Dec 17 Mar 18 Jun 18
New projects 1.25 1.49 3.42 2.27
Completed projects 1.25 1.16 1.43 0.82
Stalled projects 0.69 0.88 3.41 0.30
Revived projects 0.34 0.22 0.26 0.22
Implementation stalled projects 0.78 0.71 1.92 0.03
Updated on: 20 Jul 2018 12:20PM
Quarterly Financials of Listed Companies
(% change) Sep 17 Dec 17 Mar 18 Jun 18
All listed Companies
 Income 7.9 12.0 10.1 20.1
 Expenses 9.0 13.0 16.8 22.5
 Net profit -18.0 -14.3 -82.0 11.0
 PAT margin (%) 5.5 4.8 1.2 15.0
 Count of Cos. 4,502 4,493 4,286 96
Non-financial Companies
 Income 8.2 13.3 11.5 19.7
 Expenses 8.1 12.3 12.4 23.2
 Net profit -6.1 13.2 -2.6 6.6
 PAT margin (%) 6.2 6.4 6.5 14.9
 Net fixed assets 9.2 11.9
 Current assets 2.9 8.0
 Current liabilities 11.0 10.3
 Borrowings 3.4 1.8
 Reserves & surplus 7.9 7.8
 Count of Cos. 3,460 3,464 3,318 70
Numbers are net of P&E
Updated on: 20 Jul 2018 12:21PM
Annual Financials of All Companies
(% change) FY15 FY16 FY17 FY18
All Companies
 Income 5.6 1.8 5.9 11.6
 Expenses 5.7 1.9 5.9 16.1
 Net profit 0.1 -9.7 25.3 -43.1
 PAT margin (%) 3.0 2.8 3.4 4.3
 Assets 9.5 10.2 7.4 14.3
 Net worth 8.5 11.3 7.6 13.7
 RONW (%) 5.8 4.9 5.8 5.3
 Count of Cos. 26,129 24,412 21,971 368
Non-financial Companies
 Income 4.9 1.0 5.7 9.9
 Expenses 5.0 0.3 6.1 9.2
 Net profit -8.6 19.9 20.2 8.9
 PAT margin (%) 2.0 2.4 3.0 12.1
 Net fixed assets 13.3 17.8 6.6 55.5
 Net worth 7.0 12.1 6.5 10.3
 RONW (%) 4.6 5.1 5.9 15.0
 Debt / Equity (times) 1.1 1.1 1.0 0.3
 Interest cover (times) 1.9 1.9 2.1 8.8
 Net working capital cycle (days) 66 65 62 7
 Count of Cos. 21,306 20,431 18,292 255
Numbers are net of P&E
Updated on: 20 Jul 2018 4:05PM